Saturday, January 01, 2005

In a recent post, I noted that leading demographers think the Social Security Trustees' assumptions about longevity understate the decline in mortality and thus program costs. This is relevant to the ongoing debate about the magnitude of the program's shortfall. It has become common for those who are against reforming the system now to point out that the economic growth rate assumed by the Trustees is low relative to the last 10 years and that higher growth will boost system finances. One should also look at the other assumptions to see if they are too optimistic or pessimistic. I did this in this earlier post. Brad DeLong provides some commentary here and gives his perspective about what aspects of long-term fiscal policy are in crisis.

For the American population as a whole in the last century, most of the gains in life expectancy at birth occurred from 1900 to 1950. But most of the gains in life expectancy among people who had already reached age 65 were seen after 1950.

Last year an expert panel advising the Social Security Administration found "an unprecedented reduction in certain forms of old-age mortality, especially cardiovascular disease, beginning in the late 1960's."

The panel said Social Security was wrong to assume a slower decline in mortality rates among the elderly in the next 75 years. Rather, it said, the government should assume that mortality will continue to decline as it did from 1950 to 2000.

Ronald D. Lee, a professor of demography and economics at the University of California, Berkeley, said: "I foresee death rates of the elderly in the United States continuing to decline at the same pace they have declined since 1950. In fact, there is evidence that the pace of decline in other developed countries has accelerated in recent decades."

The article then tries to include opposing points of view:

Further, some population experts foresee developments that could wind up buttressing the forecasts of the Social Security Administration. S. Jay Olshansky, a professor of epidemiology and biostatistics at the University of Illinois at Chicago, said the era of large increases in life expectancy might be nearing an end, with the spread of obesity and the possible re-emergence of deadly infectious diseases.

"There are no lifestyle changes, surgical procedures, vitamins, antioxidants, hormones or techniques of genetic engineering available today with the capacity to repeat the gains in life expectancy that were achieved in the 20th century" with antibiotics, vaccinations and improvements in sanitation, Dr. Olshansky said.

Indeed, he said, without new measures on obesity and communicable diseases, "human life expectancy could decline in the 21st century."

Two things are missing from this discussion.

First, for Social Security's financing, it matters whether the improvements in life expectancy occur early or late in life. Reducing infant mortality is a net plus for Social Security financing, because it will increase (in a couple of decades) the ratio of workers to beneficiaries. Reducing old-age mortality is a net negative for Social Security financing, for the opposite reason. Some of the issues being discussed here pertain to mortality early rather than late in a person's life.

Second, this discussion of obesity misses the important point that while higher obesity rates will lower Social Security retirement expenditures, they may increase Social Security disability expenditures and reduce tax revenues. It is not clear that the combination is a net plus for financing. It also misses the impact on Medicare, which is even more likely to be negative, since obesity is an important predictor of many chronic conditions (like musculoskeletal injuries, heart disease and diabetes).

2 comments:

This is indeed one good response. I would appreciate, however, if you could comment on why you left the main ground of attack untouched. Namely, the actuaries are understating productivity gains (perhaps), but an increase in productivity is almost certainly not going to result in system solvency. The Trustee Report ran a sensitivity analysis on the real-wage differential that appears to suggest that an increase in the productivity assumption all the way to 2.1% would still result in a very large actuarial imbalance.

I get into this in greater detail on my blog, www.deadparrots.net: http://www.deadparrots.net/archives/social_security/0501productivity_and_social_security.html .

If I am mistaken in anyway, I'd appreciate a correction. But if I am correct, this would seem to be a salient response.

At any rate, great blog. I registered with Blogger just so I could comment here.

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I am a Professor of Economics and the Director of the Nelson A. Rockefeller Center at Dartmouth College. I am on the boards of Ledyard Financial Group (LFGP) and the Montshire Museum of Science. I blog about economics, politics, and current events at http://samwick.blogspot.com. The opinions expressed here, there, and everywhere do not necessarily reflect the views of Dartmouth College or any other institution with which I am affiliated.

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